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General Electric - A Safe Purchase?

December 17, 2013 | About:
Muhammad Bazil

Muhammad Bazil

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General Electric (GE) has been a key figure in the stock market for decades. A behemoth in its market, General Electric has a reputation for offering stockholders a sense of security. With its expansive business interests in energy, consumer and industrial, capital finance, and technology infrastructure, it seems to have a solid footing and give no cause to question its ability to endure long into the future. But do the numbers back up this lofty reputation?

General Electric in Numbers:

As an older and much more well-known company, we already know we should not be looking at General Electric in terms of a growth investment. Instead, we will scrutinize the balance sheet for evidence of sustainability and consistency.

Is it big enough?

To be considered a safe investment, a company must be large enough to withstand any fluctuations in market conditions. For this purpose, a big company is defined as one with a market cap of $1 billion or greater. General Electric’s market cap is $269.81 billion so it more than meets this requirement.

How has it been doing over the past 12 months?

Another factor to consider is the company’s trailing 12-month sales or how much it has made in sales over the immediately preceding 52 weeks (not necessarily fiscal year). General Electric has trailing 12-month sales of $145.19 billion, which is well above the mean of the market ($20.97 billion).

How much is it earning on a per-share basis?

A great indicator of a company’s strength is found in the amount of cash flow per share. This gives a more accurate picture since it takes both taxes and depreciation into account. The mean of the market at the moment is $1.62. A strong company will have a cash flow per share above this. With $2.59, General Electric is earning nearly double it on a per-share basis.

What is the current price level?

The stability of a company can be judged by the relative stability of its stock price. In this case, stability is defined as the current closing price being somewhere within a 15% range of the stock’s 52-week high. General Electric closed at $26.54 on Dec. 12, which is 3.49% below its 52-week high of $27.50. So it is within the necessary range to be considered a stable stock.

How does its price to earnings ratio hold up?

The always important price to earnings ratio (or P/E ratio) is often regarded as one of the most important factors when considering a stock for investment. When you are looking for a secure stock, a good rule of thumb  is to look for a P/E ratio that is no more than three times the current mean P/E ratio of the market and absolutely never higher than 43.

The mean of the market right now is 15.0 and as of Dec. 12, General Electric has a P/E ratio of 18.99 which puts it well within the ideal range outlined above.

What about its price to sales ratio?

The price to sales ratio (or P/S ratio) is calculated by dividing the current price of the stock by the company’s revenue on a per-share basis. This gives potential buyers a sense of whether or not the value of the stock is strongly backed by corresponding revenue. To be a secure investment, the price to sales ratio should be 1.5 or below. At 1.86, the P/S ratio of General Electric is just above where we want it to be.

What percentage of its stock is insider owned?

A strong company should have a healthy percentage of its stock owned by people inside the company. Analysts differ on what the ideal percentage is with opinions ranging from a more conservative 10% all the way up to at least 25%. With just 0.04% of its outstanding stock insider owned, General Electric does not even meet the most conservative estimates.

How strong is the company relative to its competitors?

If you are looking for a secure investment, you want a company that is dominating its market. This means you should be cautious with any company which has a relative strength index (or RSI) of less than 80, meaning it controls at least 80% of its market. General Electric just barely comes up short here with a relative strength index of 78.

Conclusions:

While there are some warning signs to be found, General Electric is, on the whole, a strong company with a sturdy foundation. This is a safe investment and a definite buy if you are looking for a secure stock in which your money can grow at a steady rate.

 

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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